What I Like About You - An Asset-Level Evaluation of Midstreamers' 2020 Prospects

As a most eventful decade for the U.S. energy industry draws to a close and 2020 looms, it’s a perfect time to consider what’s ahead for the midstream sector — and, more important from an investor’s standpoint, for the individual companies within it. The last few years have driven home the point that while all midstreamers are impacted to some degree by what happens on a macro-level, the relative success of each company is tied to the myriad decisions its leaders make over time regarding which basins and hubs to focus on and which assets to build, expand, acquire or divest. Assessing these micro-level assets and the contributions they each make to a company’s bottom line requires particularly deep analysis. Today, we discuss key themes and findings from East Daley Capital’s newly issued 2020 Midstream Guidance Outlook.

Each holiday season for three years now, our friends at East Daley have released a report on the trends and developments it sees affecting the broader midstream sector in the months ahead. The report also assesses how the ongoing evolution of the energy industry is likely to help or hurt two dozen representative companies, as well as which midstreamers it believes will perform better or worse than consensus expectations. The 2020 Midstream Guidance Outlook is a precursor to the latest edition of East Daley’s annual “Dirty Little Secrets” report, which this year is subtitled, “From Molecules to Money: Asset-Level ROCE” — ROCE standing for return on capital employed. The first section of the report, to be issued later this month, will provide an even-more-detailed analysis of midstream and market fundamentals; the second section, to be released in January, will feature company-by-company reviews.

On the big-picture front, two key conclusions in the company’s Midstream Guidance Outlook this time around are that the market, in general, is overrating concerns about (1) waning global demand growth for hydrocarbon liquids — green bars in Figure 1 — and (2) slowing U.S. production growth (blue bars), particularly in the all-important Permian Basin. As East Daley predicted a year ago, U.S. liquids production in 2019 is trending toward delivering a roughly 1.5-MMb/d year-on-year increase (blue bar within dashed red oval), partly due to incremental demand and partly due to lower production in Iran and Venezuela. Looking ahead to 2020, the report acknowledges the likelihood of slowing economic growth and even recessions in parts of the world, but rejects the suggestion that global demand for hydrocarbons has peaked. And, it forecasts another 1.4-MMb/d gain in average U.S oil/NGL production in 2020 over 2019, with at least a portion of the increase tied to OPEC’s willingness to cede more market share to support prices.

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